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					IBM Global Business Services

IBM Institute for Business Value


                                   Supply Chain
                                   Management

Globally
Integrated
Supply Chain
China perspective
            IBM Institute for Business Value
IBM Global Business Services, through the IBM Institute for Business Value,
develops fact-based strategic insights for senior business executives around
  critical industry-specific and cross-industry issues. This executive brief is
 based on an in-depth study by the Institute’s research team. It is part of an
 ongoing commitment by IBM Global Business Services to provide analysis
and viewpoints that help companies realize business value. You may contact
the authors or send an e-mail to ibvchina@cn.ibm.com for more information.
           Our website:http://www.ibm.com/cn/services/bcs/iibv/
Globally Integrated Supply Chain
China perspective
By Sean Ryu, Michelle Kam, Zhan Ying, Jiang Yi Wei, Yang Chao




                      CONTENT
                      Executive summary                                                                    01
                      Globally integrated supply chain is a trend                                          03
                      The road leading to the globally integrated supply chain is not “flat”               04
                      Operating in China: opportunities and supply chain challenges                        06
                      Seek further growth in the global market                                             10
                      Building up core competencies for a globally integrated supply chain                 14
                      Adapting the globally integrated supply chain to china specific challenges           15
                      Conclusion                                                                           24


                      Executive Summary
                      Globalization has significantly changed        Multinational companies no longer
                      the international market landscape. As         position China as just a source of
                      a result, the traditional supply chain is      cheap manufacturing. Increasingly
                      evolving towards a Globally Integrated         companies are relocating or opening
                      Supply Chain-one that operates as a more       research and development, procurement
                      integrated, optimized and collaborative        and other core functions to China.
                      network across functions, geographies          Moreover, China’s critical role in global
                      and business partners. Companies that          supply chain has been increasingly
                      globalize in this landscape face various       recognized by multinational companies.
                      external obstacles such as local market        However, due to underdeveloped supply
                      differences and protectionism, as well         chain infrastructure and a lag in core
                      as internal hurdles such as organization       competency buildup in the supply
                      structure and immature collaboration           chain, companies are facing a range of
                      mechanism.
supply chain challenges in China: multiple layer         build up the following areas of core competencies:
distribution system with limited sales visibility; lag   leveraging global assets for peak performance
in real time information sharing; long logistics lead    and effectiveness; differentiating capabilities for
time and high logistics cost; shortage of qualified      local markets; synchronizing supply and demand;
suppliers and inadequate supplier management.            incorporating sustainability in strategies and
                                                         processes; managing risk with global partners and
China is becoming increasingly integrated into           enabling collaboration and supply chain visibility.
the global economy, through trade, foreign direct
investment and cross-border M&A. China’s                 Both multinationals operating in China as well as
economic growth and integration into the global          Chinese companies are facing various supply chain
system has fostered an increase in Chinese               challenges and risks. To successfully integrate
companies that expanded their operation overseas,        into the China supply chain and the global supply
including production, sales and marketing,               chain, companies need to implement specific
distribution and customer services. However, most        actions to address China-specific challenges as
Chinese companies are still in the early market          well as build up core competencies targeted at
entry stage of globalization and therefore face a        operating in a Globally Integrated Supply Chain.
number of supply chain challenges. These supply          These actions include, but are not limited to: taking
chain challenges include: low end product image,         a holistic view for improvement and optimizing
difficulty in understanding overseas markets,            the network; developing flexible and scalable
lack of management expertise in building up the          operations; removing obstacles to collaboration;
logistics and distribution networks overseas, and        conducting a supply chain due diligence study
complex post M&A supply chain global integration.        prior to cross-border M&A; and proactively
All of these supply chain challenges are major           mitigating supply chain risks.
obstacles which hinder the growth of both Chinese
and multinational enterprises within and outside of      The ability of a company to successfully integrate
China’s marketplace.                                     the China supply chain with the global supply
                                                         chain will decide whether they are going to win
In order to capture growth in a globally connected       in the China and global marketplace. Companies
world, we believe that building a “Globally              should take early actions to set their supply chain
Integrated Supply Chain” is fundamental to               improvement agenda, continuously prioritize it and
success. In order to successfully participate in a       align it with their global and business strategies.
Globally Integrated Supply Chain, companies must




                      IBM Global Business Services
Globally Integrated Supply Chain
China perspective


Globally Integrated Supply Chain is a Trend
During the last two decades, “globalization” has       Companies are responding to the challenges
significantly changed the world and contributed        by building supply chains which are globally
to its “flattening”. With the exponential growth in    integrated. In traditional supply chains, business
international trade and cross-border investments,      partners and functional departments are isolated
companies are no longer focusing on individual         with little collaboration and information exchange.
country markets but the global market, just as Lee     By contrast, Globally Integrated Supply Chains
Scott, President and CEO of Wal-Mart Stores, said,     operate as integrated, optimized and collaborative
“Wal-Mart’s marketplace is clearly the world.”1 In     networks across functions, geographies and
the meantime, the collaboration among different        business partners.(Figure 1) They fully leverage the
geographies and companies is significantly             competitive advantages in resource, technology
increasing. The increasing openness in business        and skillsets across different geographies. This
and system standards has enabled work to flow          new model brings extensive strategic collaboration
to place where it could be best done. In this          among supply chain partners from customers
highly connected world, traditional multinational      to suppliers and service providers, as well as
companies are becoming more integrated                 increased information sharing within organizations
globally. By doing so, they can explore the new        and across the entire business ecosystem. Firms,
opportunities globally and tap into new sources        through collaboration with business partners, can
of growth with optimized global deployment of          more quickly identify and respond to new business
resources and workforce.                               opportunities around the world, be more flexible
                                                       to address the specifics of local markets, and
As companies globalize, they have to manage            optimize their supply chains globally for cost and
the much more complex cross-border logistics           service improvement.
and distribution. As a result, supply chain in the
traditional sense is stretched, and supply chain
                                                       “The ultimate competency of organization
lead time prolonged. Moreover, companies face
challenges in handling new business partners           is supply chain design”
amid language and culture barriers, as well as in                             – Charles F. Fine, Clock speed
understanding customer preferences of unique
local markets. Consequently, the costs of logistics,
supply chain operation and product development
for new markets are increasing significantly and
profit margin is declining.




                                                                  Globally Integrated Supply Chain: China perspective   
       Figure 1.
       Globally Integrated Supply Chain
                                                           Suppliers               Vendors
                                                                       Customer
                                      OEMs                             alignment                       Outsourcing
                                                                                                        partners



                                   Mfg.design /
                                   engineering
                                                  Customer order                     R&D /
                                                   management                       product
                                                                                    design

                                                                                               Procurement



                                                            Logistics              Manufacturing
                                          Other partners                                           Other 3rd parties


       Source: IBM GBS




     The Road Leading to the Globally                                         vastly differing consumer preferences. 45% of
     Integrated Supply Chain is not “flat”                                    CEOs around the world considered “understanding
                                                                              customers in multiple territories” as the number one
     Most companies have embarked on their
                                                                              challenge to run a successful global business. 2
     globalization journeys, having set up procurement
     centers, manufacturing centers and research and
                                                                              In this highly diversified global market, products
     development centers outside of their home countries
                                                                              and supply chains can no longer be the simple
     to serve regional or even global markets. Yet,
                                                                              “fit for all” global model which could be applied
     their supply chains are still far from being globally
                                                                              ubiquitously. Enterprises have to be closer to
     integrated due to various external obstacles such as
                                                                              local markets to understand the local needs
     local market differences and protectionism, as well
                                                                              and customize products as well as their sales
     as internal hurdles such as organization structure
                                                                              and distribution system and after-sale services
     and immature collaboration mechanism.
                                                                              accordingly. Ensuring a flexible supply chain to
                                                                              cater to local market requirements while preserving
     Local market differences
                                                                              the high level of efficiency and global control of a
     Despite globalization, differences in economic
                                                                              Globally Integrated Supply Chain becomes a top
     development, culture, and demographics in
                                                                              imperative for most companies.
     different countries and markets remain, and cause




   IBM Global Business Services
New protectionism                                      However, in globalization, the traditional multinational
Major importing countries have been increasingly       structure will hinder global integration of the supply
imposing new protectionist measures against            chain. First, the centralized planning and decision
emerging economies including China and India.          making result in process inefficiency which in turns
While tariffs have been reduced under WTO              leads to lack of agility and flexibility to respond to the
agreements, some countries have resorted               fast changing demands in the local markets. Second,
to non-tariff measures such as anti-dumping,           duplicate functions in each regional branch result
countervailing duties, technical standards and         in extraneous resources and prevent the optimal
government procurement restrictions.                   leverage of assets and skills. An exclusively in-house
                                                       model also implies that non-core business activities
New protectionism measures present real barriers       are being performed in-house without leveraging
in an otherwise open market. It not only impacts the   the expertise and service of external partners. And
trade and economic growth of emerging markets          last but not the least, layers of reporting mechanism
but also hinders global supply chain integration.      hinder effective communication and collaboration
Global companies now need to incur extra costs,        among the different global locations, which are key to
time and resources to address the trade barriers.      global supply chain integration.
More importantly, protectionism can prevent
companies from achieving a most optimized global       Immature collaboration
supply chain as its impacts must be incorporated       An effective Globally Integrated Supply Chain
into location decisions for sourcing, manufacturing    requires close collaboration among supply chain
and other supply chain functions.                      partners. However, many companies have not set
                                                       up effective framework or mechanism to facilitate
Traditional organization structure                     collaboration, nor have they developed sufficient
The traditional multinational organization is          trust among supply chain partners. In many cases,
characterized by having many regional branches         collaboration is project-based and lacks the long-
which are “replicas” of each other in terms of         term commitment of top management. Companies
business activities and organization functions.        are also missing well defined agendas aimed to
Individual branches report directly to headquarters    further deepen collaboration and measures to track
and are isolated from each other. For example, in      the effectiveness of collaboration. More importantly,
terms of procurement, each country may source          companies have yet to set up standardized data
independently from its respective supplier base,       and processes as well as integrated IT infrastructure
and miss the opportunity to leverage the scale         which are fundamental to effective collaboration.
of the global company. On the other hand, some
traditional multinationals tend to centralize select   “ Our supply chain planning is centralized
decisions in the headquarters, and keep certain
                                                       in the headquarters and we do not have
functions which are viewed as more “strategic”,
such as R&D, in their home countries.
                                                       the flexibility to adjust production according
                                                       to the changes of local market.”
                                                                  – A multinational cell phone manufacturer




                                                                   Globally Integrated Supply Chain: China perspective   
     Operating in China: Opportunities and                                                       China is the top market for Nokia, whose revenue from
     Supply Chain Challenges                                                                     China far surpassed that from the US, its second largest
     China’s economic growth has been phenomenal                                                 market, by % and 7% in 00 and 00 respectively.
     in the last two decades. China is increasingly                                              (Figure )
     positioned as a highly vigorous economic entity
     in the world and is integrating more tightly into the                                       Figure 3.
     global economy. China has maintained impressive                                             China accounts for a significant share of many MNCs
     GDP growth at over 9% per annum in the last five                                            global revenue
     years. In virtually all industries, the growth in China
                                                                                                  Nokia 10 major markets, net sales, EURm   2006    2005
     outpaces that of most developed countries. For
                                                                                                  China                                     91    0
     example, China’s automotive market grew four
                                                                                                  USA                                       81    7
     times that of the global rate while retail consumer
                                                                                                  India                                     71    0
     spending grew at three times the rate of the US. 3
                                                                                                  UK                                            0
                                                                                                  Germany                                   00    198
     China: an attractive market and a critical component
                                                                                                  Russia                                    118    110
     of global supply chain
                                                                                                  Italy                                     19    110
     Increasingly, China accounts for a significant share of
                                                                                                  Spain                                     119    9
     global revenue, and in many cases China is a leading                                         Indonesia                                 109    77
     market of many multinational companies (MNC).                                                Brazil                                    10    1
     Besides revenue contribution, many MNC’s also enjoy
     higher profit levels in China than in their respective                                      Sources: 2006 Nokia financial report
     home or other more mature markets. (Figure 2)
                                                                                                 Volkswagen Group’s sales in China, at 8,000 units
                                                                                                 in the first quarter in 008, exceeded that in Germany
                                                                                                 at 1,000 units, making China the largest market in
       Figure 2.
                                                                                                 terms of sales volume.
       Profit levels in China and globally for selected multina-
       tionals, 2006
                                                                                                 As ABB CEO and CFO Michel Demar stated, “ABB’s
                                      %                                                        business in China hit a milestone last year and is now
                                                               China   Global                    the largest within the group by most measures. China
                                      0%
                                                                                                 has been the most important market for ABB in all
         Net Profit (% of revenues)




                                                                                                 aspects.” In 007, ABB China accounted for 1% of the
                                      1%
                                                                                                 Group’s total orders of $ billion, ahead of Germany
                                                                                                 and the US.
                                      10%


                                      %


                                      0%
                                             Consumer Auto Consumer Auto Electronics Retail
                                             Packaged (US) Electronics (Korea)(French)(French)
                                            Goods(US)       (US)

       Source: Company annual reports, IBV analysis, 2006 AmCham Member
       Company Attitudes Survey




   IBM Global Business Services
China is without question an attractive market             in sophistication. On top of the complexity to
but also plays a critical role in the global supply        understand customer needs in a highly fragmented
chain. As of 2007, 480 of Fortune 500 companies            and dynamic market, companies in China must
had set up branches in China and more than 30              address a wide range of supply chain challenges.
of them established their regional headquarters            Furthermore, most companies’ tremendous
in China.7 Nearly 980 MNC’s established research           business growths have not been accompanied
and development centers in China. 8 A recent               by commensurate growths in their competency in
study forecasts that China will overtake the US            supply chain management.
to become the world’s largest manufacturer by
2020. 9 China’s importance as a procurement center         Highly fragmented market and multi-layered
has been increasingly recognized by MNC’s.                 distribution network
                                                           Due to the significant regional differences in
                                                           economic development, demographics and
 Coca Cola, world’s largest beverage producer, sources     culture, consumers from different provinces or
 98% of its raw materials from China. As of year-end       cities in China show huge differences in terms
 00, Sony Ericsson had 10 suppliers in China and        of purchasing power, preferences and buying
 total procurement from China exceeded  billion RMB      behavior. The highly fragmented consumer markets
 (USD . billion).10 Peter Carlson, VP of Procurement    bring great challenges in customer understanding
 at Sony Ericsson, announced that, in the near future,     and hence product development and sales and
 0% of its global procurement will be from China. For     marketing planning.
 products selling in China, 80% of raw materials will be
 sourced locally.11                                        China has a complex distribution system where
                                                           most products need to go through multiple
                                                           layers of sales channel before reaching the end
As China is quickly becoming a highly important            consumer. MNCs report that 22% of their revenues
supply base and manufacturing location and at the          flow through three or more layers of sales channel
same time one of the largest consumer markets, it          for automotive products while the figure is 42% for
is necessary to build up a much more responsive            consumer product groups.12 However, only 10% of
and effective supply chain from raw materials to           MNCs have detailed sales visibility of individual
manufacturing to the end market at optimal cost.           retail stores and 36% of them have sales visibility at
                                                           only the national distributor level.13 This has resulted
Supply chain challenges in China                           in significant disconnect between manufacturers
In contrast to the economic “hyper-growth”,                and distributors and retailers, leading to longer
the supply chain infrastructure, supporting                order cycle time, frequent stock outage, and poor
services and supply chain partners in China lag            forecasting and product cycle planning.




                                                                       Globally Integrated Supply Chain: China perspective   7
     Limited information sharing                                                different information systems across functional
     Information sharing is key to effective collaboration                      departments or with their business partners. A lack
     and achieving integration across different supply                          of collaboration culture and trust among supply
     chain functions and among supply chain partners.                           chain partners, and an immature data exchange
     Within a company, this entails the sharing of                              infrastructure, are also barriers to information
     information on the status of product R&D, raw                              sharing. The challenges are exacerbated by the
     materials procurement, production line allocation                          higher requirements of a global supply chain, as
     and logistics cycle, whereas across the supply                             the global information sharing platform will need
     chain, information shared include price, order                             to accommodate differences in time, language,
     details, product specifications, inventory levels and                      currency and other standards and practices across
     customer profiles.                                                         countries.

     Many enterprises in China have not realized                                Without adequate and timely information sharing,
     the importance of information sharing. Chinese                             supply chain improvement initiatives such as
     companies lag in terms of real time information                            proactive procurement, just-in-time delivery and
     sharing, with only 12% of companies having                                 replenishment, and on-demand forecasting and
     widely adopted real time information sharing, far                          flexible market-based adjustment present real
     behind their counterparts in North America (60%),                          implementation challenges.
     EU (70%) and India (50%). (Figure 4) Also, many
     enterprises remain highly reliant on paper-based                           Long logistics lead time and high logistics cost
     records. For the few who have digitized information,                       Limited by the underdeveloped transportation
     they have not yet established consistent                                   infrastructure and immature logistics and distribution
     processes to guide the proper data input and                               networks, companies have been faced with much
     information management, nor have they integrated                           longer logistics lead time in China. A recent survey



        Figure 4.
        Limited information sharing between business partners in China
                      To what extent has "Real-time" information                          To what extent has "Real-time" information
                          sharing been adopted at your site?                                   sharing been widely adopted ?
                                (Percent respondents)                                               (Percent respondents)
                                     12%        14%                                      A/NZ
             24%
                                                                                        Japan
                                                                        50%
                                                                                       Europe

                                                                                 North America
                                      64%     36%
                    Widely adopted     Somewhat adopted   Not adopted
                                                                                            0%         0%       0%         0%       80%

        Source: 2007 China Value Chain Study, 2005 Global Value Chain Study, IBM IBV




8   IBM Global Business Services
finds that the average order cycle time for over half                           Though 3PLs could effectively reduce the cost
of the companies in China is over 20 days, four                                 of logistics and enhance efficiency, only 18% of
times more than the 0 to 5 days for companies in                                companies in China use such service, compared
most developed countries.14 (Figure 5)                                          to 58% in US and 76% in Europe, according to
                                                                                a 2005 survey.16 This is mainly due to the highly
The lengthy logistics lead time has indirectly                                  underdeveloped state of the logistics industry. With
resulted in the high inventory cost for companies                               only 13% of 3PLs having more than 500 employees
in China, as higher inventory levels are used to                                and the top 10 3PLs account for no more than 13%
mitigate the risk of delivery delay. In 2006, China’s                           of market share in 2005, the industry is fragmented
logistics costs amounted to 6 trillion RMB (18.3%                               with no apparent, mature players.17 Moreover, only
of GDP), double of that in Western countries, which                             5% of 3PLs have adopted international standards
was only 10% of GDP.15 The enormous logistics and                               in water and highway transportation, 20% adopted
inventory costs have largely offset the cost saving                             international standards in railway transportation, and
from procurement. This potentially threatens China’s                            there is not yet any nation-wide standard for 3PLs.18
competitiveness as a sourcing and manufacturing
base, especially as prices of raw materials, land                               Qualified suppliers shortage
and labor in China have been rising rapidly.                                    Despite the fact that China is becoming an
                                                                                important procurement centre, many MNCs (34%
However, many companies do not have the                                         of respondents surveyed) believe finding qualified
capability to optimize their logistics network                                  suppliers to be the most serious challenge in
design, nor are they able to employ the services of                             procurement operation.19
third party logistics service providers (3PL).



 Figure 5.
 Order cycle time in China is longer than in other countries
                                                    For primary products, what is the average customer
                                                      order cycle time in days? (Percent respondents)
                                 100%
                                                     1%          1%           1%              19%                1%
                                                                  10%                                                %
                                 80%                                                             11%                         %
                                                                                11%                                 1%
                                        %          8%                                         10%
                                                                  %
                 Percent respo




                                                                                1%
                                 0%
                                                                                                                             1%
                                                     1%
                                 0%                                                                                         1%
                                        1%                                                                         9%
                                                                  %           %              1%
                                 0%    19%          8%                                                                     7%
                                        1%
                                  0%
                                        China        India   North America     Europe           Japan         Australia/NZ   Taiwan
                                                0 -  days        - 10 days     11 - 0 days           > 0 days

 Source: 2007 China Value Chain Study , IBM IBV




                                                                                                  Globally Integrated Supply Chain: China perspective   9
                                                               expanded their operations overseas, including
        In the 007 United Nations Industrial Development
                                                               production, sales and marketing, distribution and
        summit, VDA (German Association of the Automotive
                                                               customer services.
        Industry) China President Wolfgang R. Wagner
        reported that among FAW, BMW and Benz’s China
                                                               Between 2001 and 2006, overseas direct investment
        suppliers, only % were A-level suppliers and the
                                                               by Chinese companies more than doubled, reaching
        rest were B or C-level suppliers. The evaluation was
                                                               16.1 billion USD in 2006. Between 1994 and
        based on how well suppliers met the quality manage-
                                                               2006, cross-border M&As by Chinese companies
        ment standards, i.e., meeting more than 91% of the
                                                               amounted to 28.1 billion USD, with average
        standards begotten an A-level classification, 8% to
                                                               transaction size increasing by fifteen-fold. 21
        91% B level, and below 8% C level.0
                                                               Lenovo, China’s largest personal computer
                                                               manufacturer, acquired IBM’s PC division in 2004,
      However, faced with the shortage of qualified
                                                               thereby achieving 13 billion USD in annual sales
      suppliers, few companies are aware of the
                                                               and becoming the third largest personal computer
      importance of developing long-term, strategic
                                                               manufacturer in the world. Two years after the
      partnerships with suppliers and conducting
                                                               acquisition, Lenovo’s 2006 revenue grew 10
      strategic supplier management. Many of them
                                                               percent (from 2005) to 14.6 billion USD, while its
      do not have supplier differentiation and key
                                                               PC sales volume increased by 12%, exceeding the
      supplier identification, but rather keep switching
                                                               10% average market growth. 22
      suppliers based on price. This does not contribute
      to suppliers’ capability enhancement but will
                                                               However, most Chinese enterprises are at the early
      eventually break the sustainability of supply
                                                               market entry stage of globalization (Figure 6) and
      chain. Incidentally, it is a positive trend that
                                                               will need to establish the necessary infrastructure
      some companies are starting to consider offering
                                                               and acquire the appropriate expertise for market
      investment and technology support to suppliers
                                                               penetration and managing their global operations.
      in order to enhance their capability in quality
                                                               In particular, they face a number of supply chain
      control, production procedure and production line
                                                               challenges in their globalization journey.
      improvement.
                                                               Supply chain challenges for globalizing Chinese enter-
      Seek Further Growth in the Global Market                 prises
      Chinese companies extending their supply chains          Low-end brand image
      overseas                                                 Chinese products have long been associated with
      China has become increasingly integrated into            low-end images in terms of price and product
      the global economy, not only through export but          quality. The long entrenched low-end perception
      through foreign direct investments, including cross-     places Chinese brands at an inferior position when
      border M&As. Many Chinese companies have                 competing with foreign established brands.




10   IBM Global Business Services
  Figure 6.
  Chinese enterprises reap bigger profit by extending global operation

                        High

                                                                                                                         Global Integration
                                                                                                                    • Global sourcing;
                                                                                           Set up overseas S&D      • Global manufacturing;
                                                                                       • Local sourcing;            • Global logistics
             Profit margin




                                                          Export brand product         • Local manufacturing;       • Global sales and
                                                        • Local sourcing;              • Global logistics
                                        OEM                                                                           distribution network;
                               • Local sourcing;        • Local manufacturing;         • Overseas sales and         • Brand ownership
                               • Local manufacturing;   • Export to overseas             distribution network       • Global service delivery.
                               • Export to overseas       distributor;                   ownership;
                                 distributor;           • Brand ownership.             • Brand ownership.
                               • No brand ownership.

                         Low                                            Extend of global operation                                            High
  Source: IBV analysis




For a long time, the low-end market entry strategy                                     and many others have announced investments in
was prevalent among Chinese companies entering                                         India, Vietnam and other countries. The announced
into the global market, and even became an                                             investments of these companies have exceeded
“inevitable choice” for them. The reason behind                                        500 million USD. 24
was obvious: as China enjoyed the lower costs of
labor and raw material, it was easier for companies                                    Besides the labor cost increase, since 2005, the rapid
to compete on price in the overseas market.                                            RMB appreciation against USD has added to Chinese
                                                                                       companies’ challenges, by eroding the paper thin
However, cost advantages of Chinese enterprises are                                    profit of many export-oriented Chinese players.
unlikely to sustain. Between 2005 and 2007, labor cost
in the Pearl River Delta, among China’s largest export                                 A strong brand is also critical in competing in the
oriented manufacturing bases, increased by 20%. 23                                     overseas market. However, most Chinese brands
China is losing its low labor cost advantage to other                                  have poor recognition in the overseas market, not
emerging countries. Since 2004, American and                                           to mention that many Chinese companies are still
European multinationals have been increasingly                                         at the OEM stage. This is due to the fact that most
building manufacturing bases outside of China.                                         Chinese enterprises lack the necessary capabilities
Motorola, General Electric, Siemens, Intel, Kodak,                                     in product innovation and, as most have been
Tetra Pak, Cisco, GE, Philips, Nokia, Ericsson                                         exporters, have little first-hand information about the




                                                                                                        Globally Integrated Supply Chain: China perspective   11
      end customer’s requirements. According to IBM’s                               of overseas consumer needs will enable Chinese
      2006 Global CEO Study, a much lower percentage                                enterprises to transcend price competition and
      of CEOs of Chinese companies as compared to                                   offer differentiated products/services catering to
      global respondents rated themselves as product/                               these needs. Understanding overseas sales and
      service innovation leaders in their respective                                distribution channels will facilitate the more effective
      industries. (Figure 7) Furthermore, Chinese                                   and efficient access of target customers. Similarly,
      companies are also relatively inexperienced in the                            improved understanding of the market regulations
      building and marketing of global brands.                                      can help mitigate compliance risks, and better
                                                                                    understanding of the competitive landscape can
      Difficulty in understanding the overseas markets                              allow companies to better position their markets/
      Understanding the overseas market is critical for                             products and develop the winning strategies.
      the success of Chinese enterprises’ globalization
      efforts. It entails grasping an array of elements                             However, insightful identification of consumer
      including overseas consumer needs, sales and                                  needs is seen as the most significant challenge for
      distribution channels, market regulations, and the                            globalizing Chinese enterprises. The fact is that
      competitive landscape. A good understanding                                   it’s difficult for Chinese enterprises to understand



        Figure 7.
        Chinese enterprises are less competitive in product innovation
                Would you say your organization leads or follows your industry in innovating in Products, Services and Markets?
                                         Global                                                                 China

                                                                Clear Innovation Leader                                          1

                                                                     Fast Follower                              17

                                                                   Moves with Peers                                                   

                                                      7               Follows Peers                        10

                                                                 Follow long after Peers              8

                 0        0      0     0        10        0                              0          10         0         0             0
                                  Percentage                                                                    Percentage

        Source: IBM Global and China CEO study, 2006




1   IBM Global Business Services
consumer preferences in the overseas market due to         design of distribution channels and logistics
culture barriers. Adding to the complication are the       networks. They are also challenged to identify and
significant differences even within individual foreign     manage the appropriate channel partners. In terms
markets, e.g., individual countries within the EU differ   of business process and IT infrastructure, Chinese
significantly from each other in terms of maturity,        enterprises have not developed standardized
competitive landscape, tax levels, consumer                processes and IT infrastructure in their home
preferences, culture, and trade regulations.               country, let alone those required for managing
                                                           a global operation. The culture differences and
Lack of management expertise in building                   language barriers further exacerbate the issues.
logistics and distribution networks overseas               Last but not the least, they lack the needed
Most Chinese companies are in early stages                 resources with the right expertise to develop the
of globalization and do not have sufficient                overseas logistic and distribution networks.
management expertise on global operation. A
survey of globalizing Chinese companies found that         Complex post M&A supply chain global
“talent shortage” was among the top concerns. 25           integration
                                                           Many Chinese companies choose to globalize through
Transforming from exporter to global operator,             M&As. However, the cross border M&A is a double
Chinese companies face primary supply chain                edged sword which speeds up globalization on one
challenges in the building and managing of logistics       hand and, brings about complex post-M&A integration
and distribution networks including physical               issues, including supply chain issues, on the other.
networks, business processes, and IT infrastructure.
Physical networks consist of overseas sales and            Parties involved in M&As have their respective,
distribution channels, storage, transportation and         differing supply chain physical networks, business
delivery facilities, manpower and service providers.       processes and IT systems. The supply chain of
Business processes refer to the activities which           two given parties may not fit into each other’s
process and move the products along the supply             business model. The new merged entity may suffer
chain and the controlling mechanism. The IT                from post-M&A “supply chain syndrome”, which is
infrastructure facilitates management and control of       characterized by inconsistent distribution networks,
the business processes.                                    disparate logistics operations, disconnected
                                                           information systems and insufficient resources,
Chinese enterprises face major barriers in                 causing a series of problems such as longer lead-
establishing the overseas logistics and distribution       times, higher inventory costs, lower order fill-rates,
networks. First, they don’t have sufficient market         disgruntled employees and less satisfied customers.
understanding to determine the best mix and




                                                                      Globally Integrated Supply Chain: China perspective   1
      Making it worse, post M&A, many Chinese                 the mix as business environment changes. They
      companies choose to focus on business growth            should locate specific supply chain functions and
      while putting post-M&A integration at a lower           processes to fit in various locations, and optimize
      priority. As a result, postponing supply chain          networks to achieve the best flow of products,
      integration leads to higher levels of uncertainty as    information, money and human resources.
      supply chains gain complexity commensurate with
      business growth.                                        Differentiating capabilities for local markets
                                                              Globalization results in commoditization of products
      While business integration is unquestionably            and services, but differences in local markets
      critical to reaping the synergy M&A, it’s also          require market segmentation be coupled with
      important to ensure that the integration process will   differentiation in products and services, this is the
      not adversely impact the supply chain operation.        only way to beat competition. Differentiation requires
      After all, supply chain performance does have           companies to develop and leverage a global
      the power to “make” or “break” the efficiency and       network of supply chain partners, enabling them to
      growth objectives sought from the M&A.                  deliver customized solutions.

      Building up Core Competencies for a                     Synchronizing supply and demand
      Globally Integrated Supply Chain                        As the supply chain becomes longer and more
      As mentioned at the beginning of this report,           complex, suppliers and customers need to
      building a "Globally Integrated Supply Chain"           synchronize supply and demand to ensure continuous
      is fundamental to the success in this closely           availability of products at minimal costs. Suppliers
      connected, yet highly competitive global                should be able to collaborate with customers to
      marketplace with rapidly changing customer              develop effective and continuous demand planning,
      demand and significant local differences.               forecasting and replenishment programs, and
      To become part of the Globally Integrated               conduct inventory planning and deployment at
      Supply Chain, companies must build up core              customer sites. On the other hand, customers should
      competencies in following areas:                        be able to share real time electronic data of demand
                                                              and inventory with their suppliers.
      Leveraging global assets to optimize performance and
      maximize effectiveness                                  Incorporating sustainability in strategies and processes
      Companies need to take advantage of the                 Companies operating in a Globally Integrated
      differences in cost, resources, capabilities,           Supply Chain are subject to different environmental
      regulations and infrastructure in different countries   regulations and expectations from supply chain
      and regions. They should design the best mix            partners in various markets. At the same time, a
      of their global assets and continuously update          Globally Integrated Supply Chain inevitably increases




1   IBM Global Business Services
environmental impact due to increased requirements
                                                           Leading companies have utilized advanced software
from global logistic operations. To meet stakeholders’
                                                           applications to control and manage their supply chain.
requirements, companies should carry out
                                                           A typical application system consists of three modules:
appropriate environmental practices in each step on
                                                           demand hub, supply hub and logistics hub, which are
their supply chain. They should also leverage assets
                                                           all built into one single portal. The system gathers,
at different locations to achieve the trade-off between
                                                           processes, analyzes, and displays real-time data,
environmental impact and supply chain objectives in
                                                           providing companies with visibility and control over
cost, quality and responsiveness.
                                                           inventory, demand, order fulfillment, and transportation.
                                                           Through consolidating and synchronizing data from the
Managing risk with global partners
                                                           three modules, the system creates a “virtual” supply
As companies expand their global reach, they are           chain environment in which it generates optimal simula-
exposed to increasing risks from the diversified and       tion results to help companies make strategic decisions
sophisticated marketplace. To identify the risks as        on exception management, risk mitigation, inventory
early as possible is the first step companies take to      planning and asset deployment; and enables web-based
prevent and mitigate risk impacts. Outsourcing can         collaboration with supply chain partners. The applica-
be an effective strategy, while advanced IT tools          tion not only brings about higher supply chain efficiency
and streamlined processes can also facilitate risk         and customer retention, but also results in significant
mitigation and prevention.                                 cost savings.

Enabling collaboration and supply chain visibility
Companies need to share information such as
sales, order details, product specifications,
                                                          Adapting the Globally Integrated Supply
inventory in order to respond to changing local
                                                          Chain to China Specific Challenges
market and customer requirements fast; mobilize           As discussed earlier, both multinationals
and redeploy global assets quickly; synchronize           operating in China and Chinese globalizing
supply and demand flexibly, and make right                companies are facing various supply chain
decisions timely. The objective of information            challenges and risks. To successfully integrate
sharing is to ensure end-to-end visibility on             their China supply chain with their global
supply chain so that all parties can collaboratively      supply chain, companies need to develop
manage supply chain performance across all                China-specific strategies and implement
functions and countries. Advanced IT tools and            China-specific solutions on top of building up
streamlined processes again play an important             core competencies for a Globally Integrated
role in helping companies achieve the objective.          Supply Chain.




                                                                      Globally Integrated Supply Chain: China perspective   1
      Take a holistic view for improvement and optimize the              production cycle is; on the downstream part, they
      network                                                            should concentrate on distribution and delivery,
      The challenges facing companies operating in                       finding out what the sales channels are, and
      China are interrelated with each other. To tackle                  how much the total landed costs are, and so on.
      the myriads of problems and issues correctly                       Surprisingly, many business executives have very
      and efficiently, companies in China should take a                  limited knowledge about their supply chain in China.
      holistic view on their supply chain, because single                Without such knowledge, should supply chain
      issue handling often distracts their focus and blinds              issues take place, they do not know where to begin
      their judgment on the root cause. However, taking                  with, not even to mention finding the root causes.

         A leading retailer in China frequently received defective       Second, they should establish Chief Supply Chain
         products in its stores. It considered this a manufacturer       Officer’s (CSO) position in their organizations,
         issue and imposed penalties against its manufacturers.          (noting that most Chinese companies or even
         However, the defective product issue kept recurring while       leading multinationals do not have a dedicated
         its relationship with manufacturers worsened because of         CSO or any equivalent position). To a large
         the penalties. Only when the retailer began to examine          extend, executives limited knowledge on supply
         its entire supply chain did it find the root cause of the       chain is due to the role of supply chain has been
         problem, being poor handling during delivery. The retailer      traditionally downplayed, resulting in not enough
         then replaced its transportation provider and imple-            A CSO can act as a focal point to enable and
         mented track and trace technology to monitor shipment           encourage communication within the organization,
         status en route. As a result, defective rate reduced signifi-   because the CSO not only cascades business
         cantly from 10% to %, leading to more cost-savings and         decisions from the top but also escalates supply
         increased order fill rate.7                                    chain issues onto the Boardroom agenda. Through
                                                                         such an organization structure, supply chain issues
                                                                         will be reviewed in a holistic way, hence handled
      a holistic view does not necessarily mean initiating               and resolved in a timely manner.
      a holistic change on the supply chain. The purpose
      of looking at the supply chain holistically is to be               Develop flexible and scalable operations
      able to narrow down and locate the specific issues,                A globally integrated supply chain would improve
      thus resolving them as correctly and completely as                 efficiency and enable fast response. In China,
      possible.                                                          however, an overly integrated supply chain might
                                                                         actually prevent companies from responding
      To form a holistic view on their supply chain,                     timely and effectively to local differences arising
      companies should obtain two prerequisites.                         from China’s huge yet highly fragmented and
                                                                         constantly changing market. Thus injecting local
      First, they need to understand what composes                       features into their supply chain would benefit
      their China supply chain. On the upstream part,                    companies by allowing them to be more flexible to
      they should focus on procurement and production,                   local differences, such as customer preferences,
      knowing who their suppliers are and how long the                   distribution channels and infrastructural conditions.




1   IBM Global Business Services
Companies operating in China should also customize
                                                                           One of the world’s largest furniture retailers attributes
their supply chain strategies for different parts of
                                                                           its success in China to a very customer-centric and
China which are at different stages of economic and
                                                                           tightly integrated supply chain model. Knowing that
infrastructural development. (Figure 8)
                                                                           customers, especially city dwellers, prefer to select,
                                                                           assemble and pick up furniture items by themselves, the
Prosperous China, the most affluent and
                                                                           company directs customers to shop in the retail stores
industrialized part of China (typically tier 1 cities
                                                                           instead of ordering online. All product items are trans-
such as Beijing, Shanghai, Guangzhou and
                                                                           ported from factories directly to warehouses close to
Tianjin), where transport infrastructure such as
                                                                           its stores, and orders are measured by item availability
rail, air, port, and road are better developed, and
                                                                           in the warehouse. To speed up delivery, the company
consumers are better educated and conscious of
                                                                           uses its own dedicated fleet for home dispatch within the
quality, price and speed. Companies operating
                                                                           city. “Return Windows” are also set up in the stores to
in this segment should focus on overall supply
                                                                           shorten customer wait time for returned items. Such an
chain efficiency and logistics network optimization
                                                                           optimized distribution, replenishment and delivery model
to ensure quick response to customer demand.
                                                                           matches well with the company’s quick response strategy
Lead-time, total landed cost and order fill rate
                                                                           and greatly strengthens its customer intimacy.8
should be the key performance indicators of their
supply chain.



  Figure 8.
  Customizing supply chain strategy for different market segments(Illustrative only for reference)


                                      Prosperous China             Emerging China                            Rural China


                                                         Examples of Supply Chain Model

                               ●   Focus on efficiency     ●   Focus on supplier                      Focus on market
        Supply Chain
                                                                                                  ●

                               ●   Logistics network           managem ent & relationship             identification and
          Strategy                 optimization                enhancement                            development


                               ●   Tightly integrated      ●   Flexible & decentralised
      Operation Model              supply chain                on top of integration
                                                                                                  ●   Outsourcing


                               ●
                                   Lead-time
                                                           ●   Raw materials/
                               ●   Transportation &                                                   Incremental revenue
         KPI Metrics                                           product availability
                                                                                                  ●

                                   inventory cost          ●   Production downtime
                               ●   Order fill rate

  Source: IBM Institute for Business Value, 2007




                                                                                          Globally Integrated Supply Chain: China perspective   17
      Emerging China, China’s key manufacturing base                 Rural China, typically the inland provinces
      with fast growing consumption power (including                 and cities, some of which could also attract
      the over 300 tier 2 to 5 cities including Nanjing,             companies because of their rich natural resources.
      Shijiazhuang, Huizhou and Fushun respectively as               Because of the geographical remoteness and
      example of each of the tiers). Accordingly, supply             poor infrastructure, it would be impractical to
      chain strategies should be geared toward ensuring              pursue supply chain integration in Rural China
      continuous, uninterrupted flow of raw materials and            with the same speed and scale as in Prosperous
      semi-finished goods, improving plant productivity              and Emerging China. Instead, companies could
      and getting products out of production sites to                consider leveraging inland logistics hubs that
      end market in a timely and efficient manner. Here,             connect China’s inner landmass with its major trade
      companies face challenges such as underdeveloped               corridors, and link them with the more integrated
      logistics infrastructure, which reduces response time          supply chain network in central and coastal China.
      and increases supply chain costs, and regionalism
      and local regulations, which hampers inter-provincial
      purchasing. To circumvent these challenges,
      manufacturers should develop more flexibility in                 Nanning city of Guangxi province is rapidly emerging
      their supply chain, for example, through adopting                as the gateway to both southern China and ASEAN
      a combination of centrally and locally managed                   countries. One French leading cement manufacturer
      logistics operation.                                             who recently set up operations in Chongqing, Chengdu,
                                                                       Guizhou and Yunnan hopes to cash in on new infrastruc-
                                                                       ture development in Nanning. “Our strategy is in line
                                                                       with the government’s extensive expansion plans for the
        In order to cut costs, a major auto manufacturer in Henan
                                                                       southwest region, under its “Go West” policy. By over-
        province recently consolidated several of its regional
                                                                       coming the logistics difficulties, we can serve the market
        distribution centers into one central distribution center
                                                                       wherever we want…”1
        and required its suppliers nationwide to deliver goods to
        this central distribution center. However, due to varying
        conditions of roads leading into the central distribution
                                                                     In addition, in order to adapt to the fast changing
        centre, as well as multiple local rules on tolls, weight
                                                                     market environment, companies should also build
        limits and entry permits, many suppliers had difficulties
                                                                     up their supply chain based on Service-Oriented
        making the journey to the central distribution center,
                                                                     Architecture (SOA) so that their supply chain will
        which resulted in inventory shortfalls and production
                                                                     be able to accommodate new business processes
        delays. In response, the company decided to supplement
                                                                     and local features specific to China. (Figure 9)
        the centrally managed distribution model with several
        depots around the central distribution center and allow
        suppliers to deliver goods into the depots. This made it
        much easier for suppliers who could not truck goods to
        the central distribution center. Since these depots are of
        smaller size and scale, the gains from continuous flow of
        goods and increased productivity were able to offset the
        incremental cost of operating the depots.0




18   IBM Global Business Services
  Figure 9.
  Develop flexible and scalable solutions through SOA

                                                       Scenario A   Scenario B         Scenario C           Scenario D

        China Requirements                Sales &
                                         Marketing
      • Easily customized or
        localized
                                            R&D
      • Be componentized, but
        not too much integrated

      • Able to outsource              Manufacturing
        non-core processes

      • Easily plug-in new
        businesses                      Procurement



                                          Logistics


  Source: IBM Institute for Business Value, 2007




Remove obstacles to collaboration                                    suppliers of being inferior and being unreliable.
Collaboration with supply chain partners is among                    Instead, they should begin to look for areas where
the top priorities in building a Globally Integrated                 they could collaborate and supplement each other
Supply Chain. In China, however, the challenge                       along the value chain.
lies not only in how to identify the right supply
chain partners but also in how to work with them                     Second, companies need to strengthen information
effectively to bring out and leverage their strengths                sharing with their supply chain partners. Due
in full while maximizing cost-savings.                               to heavy reliance on manual processes and the
                                                                     lack of common IT interfaces, the extent and
First, companies should be committed to                              quality of information sharing in China is far
collaboration and building up strategic partnership                  from being satisfactory. A variety of tools could
with suppliers. This means developing relationship                   improve information sharing, ranging from simple
with suppliers beyond the transactional level. As                    mobile phone Short Messages Services (SMS) to
suppliers in China are becoming more mature and                      sophisticated Enterprise Resource Planning (ERP)
capable, the degree of business inter-dependence                     systems. However, for partners to adopt these
has gone up. Consequently, companies should                          tools, the systems and data protocols need to be
abandon the traditional adversarial view on                          user-friendly and offer clear benefits to both sides.




                                                                                 Globally Integrated Supply Chain: China perspective   19
                                                                   Third, companies should develop strategic
        One of the world largest brewing companies success-
                                                                   partnership with logistics specialists. The rapid
        fully convinced its 10 distributors in China to adopt
                                                                   de-regulation of China’s logistics industry
        web-based sales management system which helped their
                                                                   has encouraged 3rd party logistics providers
        distributors reduce inventory by offering them more
                                                                   (3PLs) to redefine their role by offering
        accurate delivery dates. To the brewing company, the
                                                                   comprehensive services from cargo delivery to
        detailed customer purchase information enabled them to
                                                                   shipment consolidation, warehousing, inventory
        target their marketing efforts more prudently.
                                                                   management, order fulfillment, product tracking
        A high-end Chinese retailer in Beijing was facing chal-    and other value-added services. Outsourcing
        lenges to maintain market leadership in China, because     logistics functions to 3PLs would result in improved
        it over-relied on manual processes, and its information    delivery accuracy, simplified processes, reduced
        system was built on multiple, disconnected networks,       transportation costs and improved order fill rate.
        which prevented real time information tracking and
        intelligent business decision support. The result was      Working with 3PLs in China is more than just
        high error rates and slow response, leading to low         getting the best contract price; it involves more
        productivity and reduced competitiveness. In response,     about developing collaborative relationship that
        the retailer implemented a data sharing platform based     would bring about mutual benefits and strategic
        on Service-Oriented Architecture that linked its ERP       value in the long-term such as being able to serve
        system with supply chain management applications,          companies' global logistics needs while offering
        and rolled out the platform to its 1,800 plus domestic     localized service excellence.
        and international suppliers. By reducing order lead-time
        from . days to . hours, improving order acknowl-        According to the VP of Logistics of a leading American
        edgement rate from 80% to 99%, and cutting order            audio manufacturer in China, “It is easy to launch a
        error rate from 9% to 1%, the retailer transformed the      customer-supplier relationship, it is more difficult to
        way it does business with its partners. More stream-        establish a strategic third-party logistics partnership...
        lined processes and increased information transparency      We treat our PLs the same way as our own staff, include
        helped the retailer make timely business decisions,         them in our daily production meetings, have them attend
        thereby strengthened its competitiveness.                 vendor workshops, and all these have a lot to do with our
                                                                    success.” The company has worked with a PL to achieve
                                                                    significant cost savings in inbound logistics by consoli-
                                                                    dating shipments in free trade zones located between
                                                                    Hong Kong and Yantian in the Pearl River Delta.




0   IBM Global Business Services
Conduct supply chain due diligence study prior to
                                                                            In a merger between two leading telecommunication
cross-border M&A
                                                                            companies, 70% of total cost savings were from supply
To overcome the post-merger “supply chain                                   chain; while in a merger between two computer giants,
syndrome” described earlier, it is critical that the                        as much as $1 billion worth of savings were derived from
supply chains of the two merging companies                                  supply chain integration.
quickly fit into the new entity’s strategy and business
model. To facilitate supply chain integration, it is
of utmost importance to include supply chain in
the pre-merger due diligence study. The objective                        Proactively mitigate supply chain risks in China
is to identify supply chain synergies, locate                            China presents tremendous growth opportunities,
hidden supply chain issues, explore improvement                          but this vast, complex and fast changing market
opportunities and initiate integration planning for the                  and the country's fast pace of globalization bring
supply chain of the new entity, so that the integrated                   along various types of risks on companies' supply
supply chain will align with the new entity’s business                   chain. Both companies operating in China and
model and strategic imperatives in advance rather                        Chinese globalizing enterprises must be aware
than “after-the-fact”.This ensures that the supply                       of and capable of managing the following major
chain is able to support the business operation of                       categories of risks. (Figure 10)
the new entity within the shortest possible transition
time after the merger, thereby maximizing the value                      Geo-political risks – risks impacting China’s
of the deal. It has proven than substantial cost                         relation with its global trading partners. Typically
savings have been generated through integrating                          includes protectionist measures targeting on
supply chains of two companies.                                          China’s exports, embargoes on imports to China,




  Figure 10.
  Supply chain risks are high in China

                  Geo-political
                                      Logistics Risks      Customer Risks             Supplier Risks          Financial Risks
                     Risks



              ●   International       ●   Poor             ●   Understanding         ●   Quality              ●   Inflation
                  relations               infrastructure       of needs              ●   Capacity             ●   Import tariffs
              ●   Civil instability   ●   Non-             ●   Acceptability         ●   Collaboration        ●   Exchange rate
              ●   Unfair trade            performance          to China              ●   Supplier             ●   Freight costs
                  policies                i.e. PL         ●   Quality
                                                                                         performance
              ●   Market entry        ●   Interruptions    ●   Lead-time
                                                                                         i.e. ability to
                  barriers                i.e. natural     ●   Order-fill rate
                                                                                         support
                                          emergencies,     ●   Satisfaction
                                          strikes              i.e. word of mouth


  Source: IBM IBV analysis




                                                                                         Globally Integrated Supply Chain: China perspective   1
      cancellation or delays of business licenses and             Each of the above risk categories could
      project go-ahead in China, and approval of foreign          potentially trigger devastating effects on supply
      direct investments in China.                                chain and the repercussion of a supply chain
                                                                  failure can be extraordinarily severe. As a
      Logistics and infrastructure risks – risks                  matter of fact, companies’ ability to identify and
      associated with China's logistics and other                 manage supply chain risks has not kept up with
      infrastructure, including under-developed                   their pace of supply chain extension in China. A
      transportation networks causing inaccessibility             case in point is the snow storm in Feb 2008 that
      to markets; power supply shortage and failure               hit central and southern China, causing power
      causing interruptions of production; limited                outage, transportation paralysis, shipment delays
      telecommunication coverage and poor IT network              and production halt. The majority of Chinese
      causing lack of visibility on shipment movements.           manufacturers were ill prepared and suffered
      All of these will impact the smoothness and                 huge financial losses. Therefore, mitigating
      efficiency of supply chain operation in China.              supply chain risks should become a strategic
                                                                  imperative for building a Globally Integrated
      Customer risks – risks associated with customer             Supply Chain in China.
      default or insolvency on one extreme, and
      cancellation of orders by the customer or failure           Under the traditional reactive approach, risk
      to retain the customer on the other. Suppliers of           mitigation in China is often carried out in ad-
      fashion, certain consumer electronics and products          hoc manner which does not serve the purpose.
      with short product life cycle also face additional          This is because most Chinese companies do not
      risk of product obsolesces.                                 really and fully understand their supply chain risk
                                                                  profile, thus resulting in underestimation of the risk
      Supplier risks – risks related to insolvency or             impacts.
      performance of suppliers and business partners.
      Many global manufacturers are concerned                     Under the proactive approach, the critical initiative
      about risks associated with Chinese suppliers’              is to understand what composes your supply
      performance such as their ability to manage                 chain and how complex and interconnected
      product quality, productivity and timely delivery,          are the supply chain activities. By answering
      which exert heavy influence on the robustness of            questions such as who your suppliers are; what
      manufacturers’ supply chain in China.                       types of risks are pertaining to your business and
                                                                  customers; what types of risks are controllable
      Macroeconomic and financial risks – risks                   or not controllable; how likely their occurrences
      associated with economic parameters along                   are; what the financial, operational, and logistical
      the supply chain such as inflation rate, currency           consequences are; many supply chain risks can be
      exchange rate, freight rates and interest rates.            predicted, avoided and minimized. An increasing
      Following China’s accession into the WTO in 2001,           number of companies are realizing this and are
      these elements are more subject to global market            committing more resources to risk assessment.
      dynamics. For example, Renminbi’s appreciation
      against the dollar has yielded savings on freight rate,
      but inflation within China has kept logistics costs high.




   IBM Global Business Services
In order to proactively manage supply chain risks,
                                                                     A world leading Aerospace and Defense (A&D) company
companies can implement certain risk avoidance
                                                                     was able to mitigate supplier risk through “supplier
and mitigation measures. (Figure 11)
                                                                     mapping”. The company was experiencing an average of
                                                                     two supplier failures per year, each failure representing a
As supply chain integration is increasingly
                                                                     financial loss of approximately $ million to the firm. The
becoming global, so are the risks. For companies
                                                                     company implemented supplier mapping processes to
operating in China, we recommend that risk
                                                                     assess supplier risks. The “mapping” processes involved
mitigation efforts should be focused on high
                                                                     identifying key suppliers, suppliers’ suppliers, critical
probability and high impact risks, particularly
                                                                     components sourced, financial metrics (i.e. credit scores)
risks associated with suppliers and logistics.
                                                                     and key performance indicators of suppliers (e.g. delivery
                                                                     performance, quality compliance rate, lead-time volatility).
                                                                     Based on the data, the company classified its suppliers
 According to an AMR study about supply chain risk                   into three categories, namely, okay, monitor, and act. As
 management, approximately 0% of the 100 global                     a result, even before the company purchased anything
 companies surveyed considered logistics failure                     from any supplier; it would have already obtained a clear
 and supplier failure as the biggest potential threat;               risk profile of a particular supplier, and with a risk mitiga-
 and about the same percentage of respondents also                   tion plan to ensure the integrity of product flow from that
 believed logistics failure and supplier failure are                 supplier. Through this approach, the A&D Company has
 increasing in China.                                              been able to eliminate further supplier failures.7




  Figure 11.
  Proactively mitigate supply chain risks in China

                                                         • Prepare contingency plans and purchase insurance for supply
                 Geo-political Risks                       chain events and interruptions in China

                                                         • Identify and develop multiple suppliers and partners in China
                   Logistics Risks
                                                         • Build information sharing and IT platform with Chinese partners
                                                           and service providers
                   Customer Risks                        • Conduct due diligence study and early integration planning on
                                                           supply chain prior to cross-border M&A

                   Supplier Risks                        • Link supply chain with Integrated Product Development (IPD)
                                                           processes

                   Financial Risks                       • Monitor China business environment and constantly adjust
                                                           supply chain strategies


  Source: IBM IBV analysis




                                                                                  Globally Integrated Supply Chain: China perspective   
      The key to minimize logistics risks lies in logistics       Conclusion
      network optimization. Leading companies
                                                                  Companies operating in China should realize
      have turned logistics network optimization
                                                                  that the success of supply chain integration both
      into a continuous process of refinement and
                                                                  within China and around the globe will decide
      improvement. They have leveraged software tools
                                                                  whether they will win China and the global market.
      such as transportation management suite and
                                                                  For Chinese companies, it means that they must
      business process modeler to facilitate logistics
                                                                  rigorously build and improve visibility, collaboration
      network design and risk assessment.
                                                                  and flexibility across their entire supply chain,
                                                                  particularly to support their burgeoning reach to
        A growing Chinese logistics provider used transporta-     the overseas market. For multinationals, it means
        tion network design tools to model its distribution       that they must tailor their global supply chain
        network, test various transportation routes, and          operation to the China market and accommodate
        perform frequent what-if analysis. The software also      local features that would improve efficiency and
        enabled the company to assess dependencies and            scalability. No "One-Size-Fit-All" supply chain will
        connections between main routes and side routes,          succeed.
        allowing them to configure the best itinerary for
                                                                  Last but not the least, supply chain integration in
        delivery and where to locate distribution centers and
                                                                  China is a transformation process that takes years
        warehouses for a variety of customers through simula-
                                                                  to accomplish. Both Chinese enterprises and
        tion. By continuously reassessing and remodeling its
                                                                  multinationals should prioritize their supply chain
        logistics network, the company was able to develop
                                                                  integration upon market dynamics, operation
        a clear understanding of the logistics risks across
                                                                  maturity, organizational readiness, and align
        different regions in China, which helped them make
                                                                  supply chain initiatives with both their global and
        strategic decisions on resource deployment to avoid
                                                                  China business strategies.
        and mitigate logistics risks. As a result, supply chain
        interruptions such as shipment delays, road accidents,
        delivery failures and inventory shortage have been        Author
        avoided and reduced, and its customers have become        Sean Ryu: Partner and Greater China leader of Supply
        more satisfied.8                                         Chain Management, IBM Global Business Services

                                                                  Michelle Kam: Director for Institute for Business Value,
                                                                  China, IBM Global Business Services

                                                                  Zhan Ying: Senior Consultant, Institute for Business
                                                                  Value, China, IBM Global Business Services

                                                                  Jiang Yi Wei: Consultant, Institute for Business Value,
                                                                  China, IBM Global Business Services

                                                                  Yang Chao: Managing Consultant, Supply Chain
                                                                  Management , IBM Global Business Services




   IBM Global Business Services
Acknowledgement                                           References
Karen Butner: Institute for Business Value (IBV) Global   1
                                                               Wal-Mart Stores, Inc.2006 Annual Report
SCM Leader, IBM Global Business Services
                                                          2
                                                               Economic Intelligence Unit, CEO Briefing-Corporate
Dong Bae Park: Associate Partner of Supply Chain               priorities for 2007 and beyond, Participants:1006
Management, IBM Global Business Services                       global CEOs
                                                          3
                                                               AC Nielson, 2006; Chinese Association of
Jae Cheon Lee: Senior Managing Consultant of Supply
                                                               Automotive Manufacturers (2006),
Chain Management, IBM Global Business Services
                                                          4
                                                               Nokia annual financial report, 2006, IBV analysis
Shen Guo Xiong: Senior Managing Consultant of Supply      5
                                                               Shanghai Foreign Economic Relation & Trade
Chain Management, IBM Global Business Services
                                                               Commission, April 2008
Liu Wen: Senior Managing Consultant, Supply Chain         6
                                                               China Daily, 14 th March, 2008
Innovation Center, IBM Global Business Services           7
                                                               China Investment Report , Ministry of Commerce of
                                                               People’s Republic of China, Department of Foreign
Fan Shun: Managing Consultant of Supply Chain
                                                               Trade, January 2008
Management, IBM Global Business Services
                                                          8
                                                               Ibid
Shi Peng: Senior Managing Consultant, IBM Global          9
                                                               Financial Times, May 30 th 2007, according to Global
Business Services
                                                               insight study

Xu Xu: Research Assistant, Institute for Business
                                                          10
                                                               Exchange rate: 31st Dec, 2006, Bank of China
Value, China, IBM Global Business Services                11
                                                               China Enterprise Confederation and China
                                                               Enterprise Directors Association, 2007
About IBM Global Business Services                        12
                                                               2006 IBM-EIU Survey of MNC’s in China; IBV China
With consultants and professional experts in more              analysis
than 170 countries, IBM Global Business Services          13
                                                               Ibid
provides clients with deep business process               14
                                                               2007 China Value Chain Study, IBM IBV
and industry expertise across 17 industries,              15
                                                               2006 China logistics development report, National
using innovation to identify, create, and deliver
                                                               Development and Reform Commission; Ding Junfa,
value faster. We draw on the full breadth of IBM
                                                               Executive Vice President of the China Federation of
capabilities, standing behind our advice to help
                                                               Logistics & Procurement, Speech in International
clients implement solutions designed to deliver
                                                               Purchasing Forum in China, 2005
business outcomes with far-reaching impact and            16
                                                               The 6th Survey Report on China Logistics Supply
sustainable results.
                                                               and Demand, China Association of Warehouse and
                                                               Storage, 2005
                                                          17
                                                               Ibid
                                                          18
                                                               Ailian Zhou, Xuhong Li, Haijun Mao, The
                                                               Logistics Standardization in China: Situation and
                                                               Recommendation, Economics of Commerce and
                                                               Trade, June 2007




                                                                          Globally Integrated Supply Chain: China perspective   
19
     2006 IBM-EIU Survey of MNC’s in China; IBV China
     analysis
20
     World Financial Report, Nov 2007
21
     World Investment Report 2007, United Nations
     Conference on Trade and Development
                                                          © Copyright IBM Corporation 2008
22
     Lenovo Annual Financial Report, 2006/2007
                                                            IBM Global Services
23
     Bao, Ming Hua, deputy director of the                  Route 100
                                                            Somers, NY 10589
     Macroeconomic Research Institute, China Renmin         U.S.A.
     University, “China’s labor cost is gradually           Produced in the United States of America
     increasing, labor cost advantage will disappear in     02-07
                                                            All Rights Reserved
     five years”
                                                            IBM and the IBM logo are trademarks or
24
     “The investment trends of ‘China +1’ strategy of       registered trademarks of International Business
                                                            Machines Corporation in the United States, other
     multinationals enterprises” the Policy Research
                                                            countries, or both.
     Office of the Ministry of Commerce, People’s
                                                            Other company, product and service names may
     Republic of China, April 2007                          be trademarks or service marks of others.
25
     IBV and Fudan Globalization survey, 2005               References in this publication to IBM products
                                                            and services do not imply that IBM intends to
26
     IBM Global Business Services                           make them available in all countries in which
                                                            IBM operates.
27
     Ibid
28
     Ibid                                                   Beijing Office
29
     Winning in China’s Mass Market                         IBM Tower, Pacific Century Place, 2A Gong
                                                            Ti Road, Chao Yang District, Beijing
30
     IBM Global Business Services                           Post Code: 100027
31
     China Supply Chain News, Issue CN-20 Jan 2007          Te l: (010)63618888
                                                            Fax: (010)63618555
32
     IBM Institute of Business Value-Winning in China’s
     Mass Market                                            Shanghai Office
                                                            Building 10, 399 Ke Yuan Road, Zhangjiang
33
     IBM Global Business Services
                                                            Hi-Tech Park, Pudong New District,
34
     Inbound Logistics, Jan 2006, Innovation: A Fresh       Shanghai, China
                                                            Post Code: 201203
     Eye on the Supply Chain
                                                            Te l: (021)60922288
35
     Harvard Business Review, Oct 2005-How Supply           Fax: (021)60922277
     Chains Drive M&A Success
                                                            Guangzhou Office
36
     AMR Research-Strategies for Managing Supply            40B, Center Plaza 161, Linhexi Road,
     Chain Risk                                             Tianhe District, Guangzhou
                                                            Post Code: 510620
37
     Ibid
                                                            Te l: (020)85113828
38
     IBM Global Business Services                           Fax: (020)87550182




                                                            G123-0067-00 EN

				
Global Supply Chain Council Global Supply Chain Council http://www.supplychains.com
About Founded in 2002, the Global Supply Chain Council is Asia’s leading professional organization serving a fast growing community of more than 60,000 executives and representing leading companies who view their value chains as a critical driver of shareholder value and competitiveness. As an independent professional organization, the Council’s mission is to stimulate the understanding and adoption of supply chain management by providing a range of services including websites, magazine, directory, newsletters, research, workgroups, conferences, maps, video programming among other services. Targeting manufacturers and retailers end-users on line, in print and in person, the Council delivers a unique combination of education and lead-generation sources that helps logistics service providers, consultants, and software vendors and equipment suppliers achieve their growth objectives.